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Sample Questions
Question 1
Easy
Which of the following best describes the role of an exposure base in the ratemaking process?
Solution
C is correct. An exposure base is the fundamental measure of the amount of risk an insurer assumes. In the rating algorithm, premium equals the rate (price per unit of exposure) multiplied by the number of exposure units. Because pure premium is defined as losses divided by exposures, the exposure base serves as the denominator that normalizes loss experience so rates can be developed on a per-unit basis.
Question 2
Medium
While vetting exposure data for a stable book of annual policies, a reviewer finds that reported earned exposures exceed written exposures in every year. What is the most appropriate first response?
Solution
A is correct. Earned exposures can never exceed written exposures over the life of a stable book, because exposure is earned only after it has first been written. Observing earned above written in every year fails a basic reasonableness check and points to a data problem such as double-counting, a units mismatch, or a mapping error. The correct action is to investigate and correct the data before relying on it.
Question 3
Hard
An actuary must project unpaid unallocated loss adjustment expense (ULAE) for a commercial line whose claim counts have been growing rapidly while paid losses lag behind the exposure growth. A colleague proposes the classical paid-to-paid method. Which limitation of that method is most relevant here?
Solution
B is correct. Current ULAE includes the work of opening and maintaining new claims, while paid claims can reflect older, smaller cohorts. Dividing current paid ULAE by that lagging paid-loss base can inflate the selected ratio. Growth alone does not prove that the resulting reserve understates future workload. Kittel's refinement uses the average of calendar-year paid and incurred claims in the denominator; incurred claims include paid claims plus the change in case outstanding and IBNR. When incurred claims exceed paid claims, that denominator is larger and the selected ratio is lower. The classical method also assumes half the ULAE is spent at opening and half at settlement, but that general timing limitation does not specifically explain the growth-related denominator mismatch in this scenario.
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